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US Investors Placing Higher Emphasis On Tax

by Mike Godfrey, Tax-News.com, Washington

08 December 2005


American investors are placing more importance than ever on the tax implications of investing and conceptually support an extension of tax cuts, according to a new study by Eaton Vance Corp, a US-based investment firm.

The nationwide survey of 408 US residents, conducted by Penn, Schoen & Berland Associates, Inc., reveals that 9 out of 10 investors (89%) say the impact of taxes on their investment returns is important to them - the highest level of importance ever registered by the annual Eaton Vance National Investor Survey. In addition, a majority of investors polled (52%) described the impact of taxes as very important, a 10 percentage point increase over last year.

In other findings, nearly half (43%) of investors surveyed said that President Bush’s tax cuts helped the economy, compared to 26% who said they hurt the economy. A majority of investors (55%) believe the economy would be hurt by a failure to extend the 2003 Tax Act beyond 2008, when some of its provisions are set to expire.

Half of the investors polled (50%) revealed that they are concerned they may be subject to increasing capital gains taxes. Nearly half (47%) say they paid taxes on capital gains in 2004 and 65% said they paid them within the past 5 years. A surprisingly small 46% of investors expect to pay capital gains this year, a position which Duncan W. Richardson, chief equity investment officer at Eaton Vance considered an example of "hope triumphing over experience".

"There is little to justify investors’ apparent expectation that capital gains taxes will be flat year-over-year. In fact, even with modest equity market returns this year, capital gains distributions could be quite high," Mr Richardson observed.

However, the survey revealed that US investors are becoming more tax savvy. Half of respondents (50%) selected low-yielding growth stocks held long term (18%) and municipal or tax-free bonds (32%) among the types of investments they thought offered high-tax efficiency. A growing number of investors (44%, as compared to 27% in 2001) also said they have invested specifically with consideration to after-tax returns or tax efficiency.

The survey revealed that 46% of investors found their way to tax-managed funds due to investment advice from their financial advisors, compared to 29% last year. Of the 36% of investors who say they are familiar with tax-managed stock mutual funds, a growing number said they had invested in such funds (40%, up from 29% in 2001). In comparison to years past, more investors who have used these and other tax-efficient vehicles correctly identified their primary objective as maximizing after-tax returns--29%, up from 15% in 2001.

Investors also showed an interest in learning more about the effect of taxes on their investments. The Eaton Vance study has consistently shown over time that roughly 70% of investors polled said they carefully review the statements they receive from their investment manager or advisory firm with regard to tax implications related to their investments. Further, 84% of investors say they consider disclosure by fund companies of the tax implications of investing important.

The survey also found that investors’ detailed level of knowledge on taxes remains low. For instance, only 1 in 8 investors (12%) can correctly cite the current maximum federal tax rate for ordinary income, and only 1 in 4 investors (27%) can identify the maximum federal tax rate for long-term capital gains (which is 15% for those in a 35% bracket).

“Many investors don’t appear to realize that the 2003 Tax Act created some great opportunities to increase after tax returns,” noted Mr. Richardson.

“Studies have shown that 2% per year is unnecessarily lost to taxes. It is a near certainty that tax-savvy financial advisors can add value year in and year out by recovering some of that 2% for their clients through simply knowing and making use of the current tax code," he added.


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